China, Financials Settle Into Bear Market Territory

If 2007 had to be summed up in a word, the two-syllable winner might be, "sub-prime." It single-handedly dragged down the entire financial segment of the U.S. stock market.

How far down? On Friday, the Financial Select Sector SPDR (XLF) closed 28% below its March 2007 peak.

It didn't take 9 months for China to fall more than 20% from a high point. The iShares FTSE/Xinhua China 25 Index (FXI) needed little more than 1 month and 1 week to fall 25.5% from its November top.

There's more. On October 9, 2007, when broad markets everywhere had hit new highs, the difference between the iShares FTSE/Xinhua China Index (FXI) and the Financial Select Sector SPDR (XLF) was 25 percentage points. That difference is now only 10 percentage points.

What might this change tell us about investor appetite for risk? Conversely, do we need to define bear markets differently for emerging markets? After all, the perception about FXI and XLF is as different as oil and vinegar. (China enthusiasts are as bullish as day-trading oil speculators while nearly every investor has soured on financial stocks.)

It is possible that China is merely "pulling back." Yet one has to look at the real possibility that risk is coming off the table around the globe.

For instance, the Russell 2000 Value Index (IWN) of small-cap value stocks, the Zacks Micro Cap Index (PZI), the U.S. Consumer Discretionary Index (XLY), the Goldman Sachs Semiconductor Index (IGW), Taiwan (EWT), and Sweden (EWD) are also struggling with bear market (-20%) losses. Naturally, it begs the question, is it going from bad to ugly across the board?

Actually, no. There are a few bull market trends left standing. Energy and natural resources continue to prove desirable. The iShares Natural Resources Fund (IGE) is well above its long-term trend.

What's more, money continues to favor the less risky areas of utilities and health care. Global Utilities (JXI) and US Health Care Providers (IHF) are still near record highs.